Knowledge and the Wealth of Nations

[Bill] Gates…took Mike Spence’s famously difficult advanced microeconomics course — at the very dawn of the excitement about "bandwagon effects," monopolistic competition, and network economics.  Enrolled in the course as well was Steve Ballmer, a fellow cardplayer with whom Gate had grown friendly.  The two finished first and second in the course, but Gates didn’t wait for his grade.

That is from David Warsh’s Knowledge and the Wealth of Nations.  Maybe this is the book of the year so far (I can no longer remember how much I liked Stumbling on Happiness).

While it pretends to focus on a single article — Paul Romer’s 1990 piece on endogenous growth — the book is a tour de force through growth theory, the economics profession, the world of public intellectuals, and how science works.  Paul Krugman, Greg Mankiw, Bob Solow, and Bob Lucas play prominent roles, in addition of course to Romer.  If you want to read one book on how the economics profession works, this is it.

Paul Krugman wrote:

I’ve never seen anyone write as well as Warsh about the social world of economic research, a world of brilliant, often eccentric people who bear no resemblance to the dreary suits you see discussing the economy of CNBC.  It’s a world of informal manners yet intense status competition…

The book will please both specialists and neophytes.  Warsh’s coverage is so thorough that even yours truly makes a few cameo appearances.  I thank David for the coverage, and I recommend his book highly.


Speaking of books entitled "... and the Wealth of Nations," will economists ever pay any coverage to 2002's "IQ and the Wealth of Nations?" I once showed the key scatterplot in it, the one showing a .73 correlation between national average per capita income and national average IQ, to a certain Nobel Laureate economist and he looked at it like I was handing him a dead rodent. He'd spend 50 years ignoring the role of IQ in human capital, and he wasn't about to start now.

Dan -
There's also the fact that IQ is such a taboo topic that not many academics care to be seen endorsing the IQ/national wealth theory, or even giving it serious consideration.

Dan writes:

"b) Most economists believe that IQ is not purely a hereditary trait. If IQ is just proxying for quality of education system (or wealth), then it doesn't explain anything new..."

This is another common misconception, the idea that if the causes of IQ differences are not 100% hereditary, then we don't have to think about them. Even if the gap is 100% environmental, it can still last a long, long time and thus have vast implications for the global history of the 21st century.

For example, one of the big questions on people's minds is what is the economic potential of China versus India. According to Lynn's latest book, the average IQ in China, based on 10 fairly recent studies, is around 106 (on a scale where white Americans score 100). In contrast, in India, based on 13 studies, it is around 83. There is a lot of noise in the data, but there is clearly a gap of some size.

Let's say that gap suddenly disappeared with every new baby born in India and China starting tomorrow. How long until the average IQ of the overall Indian workforce equals that of China? Until 2071! In fact, the gap wouldn't even be half gone until 2047.

Moreover, in fact, we didn't see sudden rises or declines in relative IQ in the 20th century. We do see some shifts -- the East Asians have likely picked up some points on the rest of the world from better environment, but changes are not rapid. Changes in relative height have probably been happening faster than IQ.

See this for some graphs illustrating these points:

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